Banking and negative due diligence challenges
Flags and negative statements on due diligence databases can have a catastrophic effect on the ability to bank and trade freely for individuals and businesses. Here we look at how to handle challenges to a reputation with the financial community owing to compliance issues being raised.
What questions do people ask about negative due diligence results?
We find that there are a core set of questions that people want to ask in relation to this topic, so we will attempt to answer each of the following questions:
- What due diligence do banks and other institutions do?
- What happens if I get red flags on my due diligence?
- What is negative due diligence?
- How do I challenge results on World-Check or other compliance databases?
- What strategy can I use to avoid compliance problems?
- How do I ensure that any controversies do not impact my ability to trade?
- How will allegations made against me impact my due diligence profile?
- What happens if I’m deemed a PEP (politically exposed person)?
- How do I stay on top of ongoing due diligence processes?
- Why do I demonstrate the source of my funds?
If you only have 60 seconds, here’s what you need to know:
● Adverse due diligence results can seriously hamper your ability to operate, including losing existing banking facilities
● You have a right to challenge imbalanced and unfair material to improve your situation
● It’s essential to act as soon as an issue is identified to avoid interruption to your business or finances
● It’s vital to stay on top of your reputation with the financial world to avoid problems now or in the future
Over the next few minutes, this article will begin to help you understand what you can do if you or your business is impacted by adverse results in due diligence reports, including the withdrawal of banking facilities.
The first question we get asked is often “what can I do if I have red flags on compliance databases”. A good starting point is to look at what these databases are, how they are used and the impact they have on your reputation with financial institutions.
What are the due diligence databases and how do you get on them?
Recent years have seen more forceful anti-money laundering rules brought into effect across the globe, often backed by swingeing fines for banks who fail to perform adequate checks. One of the reactions to this is that financial institutions now turn to third-party data as the first stage of assessing the risk of doing business with a customer – or continuing to provide banking facilities to existing customers.
This is where due diligence databases like World-Check and LexisNexis come in. Their purpose is to aggregate public domain information together with sanctions lists on a wide range of individuals and businesses as the first step of banks’ “know your customer” (KYC) processes – a bit like a credit reference agency but for the risk of corruption or controversy. The problem comes that alongside using official data like Interpol lists, they also use NGO and media information as a way of indicating warning signs of allegations of wrongdoing or corruption, and it is here that most of the problems we encounter for clients come in. Those reports aren’t tested for whether they are true or not before being added to your record, and usually you are not aware of them until they cause you a problem, so an allegation in the media – even if untrue, historic or later disproven – is capable of causing serious problems to your reputation with banks.
How do banks use the databases?
As part of standard client due diligence, banks and other financial institutions will check new clients against the databases to see if any red flags come up. If you or your business have been connected in some way to a controversy or scandal in the media, or you or your business have connections to political figures, there is a good chance the business and individuals may feature on the list. Many banks we know of, including HSBC, run such checks on an ongoing basis.
Often at this stage banks will simply decline to deal with an individual and record that they have failed compliance checks. Alternatively, they will ask for an explanation of the allegations appearing.
What do I do about problems with compliance databases?
If you or your business have been involved in a controversy that has featured in the media, then we recommend it is best to take a proactive approach to compliance and ascertain whether you feature (or whether you are added) to databases before you need to worry about them (for example changing financial suppliers).
If you do feature on a database then we have the opportunity to challenge and remove the content, but the first question is how do you find out what the database says about you?
How do I find out if I am flagged on compliance databases? What practical steps can I take to remedy the situation?
Our approach is:
1. Conduct a search of World-Check or LexisNexis in your own name, or have us conduct a search, to see what the entry is
2. If the entry is incomplete or does not disclose the problems, use your subject access rights under data protection law to obtain information about the flag
3. If an institution has red flagged on compliance grounds, but it is unclear why, we can also use the subject access rights under data protection law to seek information of what information the bank holds about you.
Often institutions will undertake their own research too, so it is important to take a broad approach to understanding the full scope of the problem before you start fixing it.
A negative due diligence result is not insurmountable.
Can you challenge due diligence database contents?
In short, yes. The databases are publishers and the usual legal standards apply to the repetition and publication of false allegations about individuals or businesses. Last January World-Check was forced to apologise in Court to Finsbury Park Mosque for defamatory allegations in its listing of the business. Likewise, data protection law applies to the database companies and they need to respect data protection laws around the use of outdated or untrue information.
How to challenge them depends on the nature of the allegation. In some cases it is an issue of demonstrating an allegation has been disproven, in others, it may be necessary to show the publisher it is untrue or place the onus on them to prove what they say is true. Where parts of allegations are true, or others in a story face challenges, a strategy instead has to be adopted of demonstrating the source of funds and that they can be separated from the issue that has caused the due diligence red flags.
What do you do if you are a PEP or the entries are true?
Unless you can demonstrate the source of your funds and adequately explain any questions that arise, retaining and commencing banking relationships with credible institutions will not be easy. The process of satisfying compliance processes in these circumstances usually starts with tracing back to source your business dealings, the flow of funds and explaining the origins and legitimacy of the transactions that underpin them. This is not always a short process, but preparing a pack of information that demonstrates the legitimacy of funds and can be kept up to date as your business and finances evolve is strong protection against facing challenges to your ability to bank or freedom to transact.
Can I continue to bank when under investigation?
If you are known to be the subject of an investigation then you are likely to find serious difficulties in your financial relationships. At this stage, it is often vital that we work with your counsel undertaking work on the substantive dispute to help you show that you are addressing any issues, and that you can demonstrate assets and fund sources outside the scope of the controversy.